All Things Financial Planning Blog

Want to Avoid Capital Gains and Get a Tax Deduction?

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How to Give Like a BillionaireTax rates are almost certain to increase in 2013. But did you know that there is something you can do to avoid capital gains tax and get a tax deduction to boot? If you regularly give cash to your favorite charities, early planning and strategic gifting could net you and your favorite charity more than you expected. This holiday season, consider giving appreciated stock instead of cash to charity…its one way you can avoid paying capital gains and get a tax deduction.

Larger Tax Deduction
According to “Giving USA: The Annual Report on Philanthropy”, Americans gave close to $300 billion to charities in 2011. There are so many ways to help your favorite charity: you can donate your time, clothing and other household items, vehicles and boats, and of course money. But, did you know that you can also donate stock? In fact, if you own highly appreciated stock, you might be better off donating the stock versus cash. Let’s assume you plan to give $5,000 to charity this year. You could write a check for $5,000. However, if you own stock that you purchased for $1,000 and it’s now worth $5,000, the IRS allows you to deduct the fair market value of the donated asset (the higher amount). A win-win situation for both your charity and you.

Zero Capital Gains Tax
Capital gain is the profit you make on the sale of an asset; it is the difference between the sales price and your cost. Capital gains are subject to tax, and the maximum tax rate is currently 15 percent, but it is highly anticipated to rise in 2013. Continuing with the same example, assume you bought $1,000 of PowerShares QQQ (index fund that tracks the NASDAQ) several years ago, and it’s now worth $5,000. If you sold your QQQs, you would owe capital gains tax on the profits ($4,000) of about $600. However, if you donate your shares, you will not only receive a $5,000 tax deduction, but you will also avoid having to pay capital gains tax on the profit.

About Donor Advised Funds
Although donating stock can be a smart move from a socially conscious perspective as well as a financial one, many smaller charities are not setup to accept stocks as donations. Additionally, what if you do not want to give the entire $5,000 to one charity? It can be administratively difficult to subdivide stocks into small donations if you were planning on making several “smaller” donations to multiple charities. From a purely financial perspective, sometimes it is usually more prudent to make one large donation for tax and estate planning purposes. The good news is that through a donor advised fund, you can do both: make one large donation and decide later on which charities will get the money.

A donor advised fund is an investment vehicle that lets you irrevocably donate cash, securities, or other assets to the fund to get the tax deduction in the year you fund it. Once donated, the assets belong to the fund and you recommend whom the fund should donate money to. The donor advised fund can either make the donation in your name or anonymously. Continuing with our previous example, assume you donated the $5,000 of PowerShares QQQ to a donor advised fund in the year 2012, you can then have the fund make donations on your behalf whenever and to whichever charities you wanted in much smaller increments. While donor advised funds are very easy to manage and setup, like most things in life, they come with a cost. Some firms impose annual fees and others require a minimum donation to start the fund, so do your due diligence. But given the numerous tax, financial, and estate planning benefits, a donor advised fund is still worthwhile to consider.

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA

Author: Ara Oghoorian, CFA, CFP®

Ara Oghoorian, CFA, CFP®, is the founder and president of ACap Asset Management, Inc., a boutique wealth management firm located in Los Angeles, CA. ACap provides comprehensive investment management and financial planning services with a niche in advising physicians and medical professionals. Ara began his professional career 20 years ago at Wells Fargo Bank in Huntington Beach, CA piloting new supermarket banks. He then moved to San Francisco to obtain a degree in finance and worked full time at the Federal Reserve Bank. Ara spent nearly nine years there as a bank examiner where he audited U.S. banks, bank holding companies, and foreign institutions from Japan, Hong Kong, China, Korea, Taiwan, Philippines, United Kingdom and France. In 2005, Ara accepted a prestigious position with the US Department of the Treasury as the resident advisor to the Ministry of Finance and Economy in the Republic of Armenia. He was responsible for advising the top officials of the Republic of Armenia on how to transition from a centralized audit function to a decentralized system. Upon his return to the US, Ara worked for a wealth management firm in the Washington DC area advising and managing the personal wealth of CEOs from Fortune 500 companies. Ara has spent his entire career in finance and as a result, he has a firm grasp of financial markets, economics, and their interactions. He is a member of the CFA Institute, CFA Society of Los Angeles, Financial Planning Association of Los Angeles, NAPFA, and Toastmasters International. In addition to his work in finance, Ara also sits on the board of the World Children’s Transplant Fund where he also chairs the annual Global Partners’ Dinner. Ara is a frequent speaker at local medical schools, medical societies, professional organizations, and private businesses. He has a degree in finance from San Francisco State University, is a Commissioned Bank Examiner through the Federal Reserve Board of Governors, holds the Chartered Financial Analyst (CFA) designation, Certified Financial Planner designation, and holds the Series 65 license. Ara currently lives in Los Angeles with his wife and two sons.

2 thoughts on “Want to Avoid Capital Gains and Get a Tax Deduction?

  1. Great work! I think that this will be a good post for all the financers as well as for the entreprenuers.

  2. It is actually a great and useful piece of information. Thanks for sharing.

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